2020 is almost over. It seems like a bigger than normal celebration is in order, but ironically, the usual New Year’s festivities will be muted. Lockdown orders and an unwillingness to gather in crowds will do that.
You can’t live through such a unique year without learning something. Maybe it was how to make a mask with an old t-shirt and duct tape, or perhaps it was how to time deliveries at your local supermarket so you could hoard Clorox Wipes.
What have I learned? I’m glad you asked.
Do it now
“The future is promised to no one.”
A great quote that either came from the Bible, Clint Eastwood, or Walter Payton – Google seems confused. Regardless, 2020 reinforced this concept with the subtlety of a tire iron to the knee.
Globally there have been 1.6 million poor souls that have died from COVID-19 – a tragic number that continues to climb and a stark reminder that tomorrow is not guaranteed.
So, do it now. Whatever you’ve been putting off, do it now. Of course, now doesn’t necessarily mean this instant. Do it as soon as it’s reasonably safe. Time with loved ones, long-delayed retirement planning, bucket-list travel – whatever you’ve been putting off. If it’s important to you, 2020 should be that gentle forceful push to get you moving.
Don’t try to time the market
Sure, it’s easy. Sell high and buy low.
When you’re unemotionally scanning a long-term chart of the S&P 500 in your pajamas, with hot cocoa by your side, the 2020 market drop seems like a tiny blip. Living through it was quite different. With a pandemic raging in the world and global stock markets plunging, opening a newspaper (or news website of your choice) delivered headlines like this:
And my favorite :
These articles appeared in the March 22nd edition of The Wall Street Journal – the day before the S&P 500 bottomed.
Successfully timing the 2020 market involved two trades – selling before the most rapid bear market in history and buying before the fastest recovery. I’m sure everyone has an uncle who brags about how they nailed it to the day, but for most, coming out ahead navigating this market was extremely difficult.
How hard is market timing? The September 2007 article “Mutual Fund Flows and Investor Returns: An Empirical Examination of Fund Investor Timing Ability” measured mutual fund investors’ performance from 1991-2004. Investor timing decisions caused them to average returns that were 1.56% lower each year than they could have been. Compounded over a lifetime, this is a crippling blow to an investor’s net worth.
There is undoubtedly an investment guru who sidestepped the crash nimbly and then bought aggressively at the bottom. You’ll hear all about their genius. Don’t be impressed until they do it a second time.
The best course of action? Keep diligently adding to your retirement accounts. You’ll buy more at lower prices, and your nest egg will thank you. Buy and hold investing works.
The emergency fund became sexy
For most people, the emergency fund is boring. It’s a pile of cash in a high-yielding account (try to control your laughter, these used to exist) that sits there unloved. That’s until a once-in-a-generation pandemic sweeps the globe and leaves financial destruction in its wake.
Financial planning 101 – save 3-6 months of expenses for a rainy day. And every so often, a torrential downpour like 2020 comes along to make you happy you did.
If you made it through the year with your job, you were one of the lucky ones. Nearly 16 million Americans were not so fortunate.
I’ve written many times that the emergency fund is not sexy, but it’s critical when you need it. It can reduce stress and give you extra time to weigh your options when an emergency strikes.
Retirement may come earlier than you think
“First time in nearly 50 years people 55 and over have lost jobs at a higher rate than younger peers” – AARP
Unemployment has hit older workers hard during a time in their lives traditionally used to shore up retirement savings. These high-income years, paired with the ability to make catch-up contributions, are often instrumental to the financial success of a retirement plan.
Whether it’s companies trying to cull well-compensated employees, or other forms of ageism, this development is unsettling. It may become the normal course of action when future economic shocks hit the economy.
Even in good times, older workers often leave the workplace earlier than planned. Issues such as health or caring for loved ones can cut short a career.
The pandemic is a harsh reminder that plans don’t always go as expected.
The best way to prepare for the unexpected is to develop a retirement plan early and fund it aggressively. If you’d like to retire the day you reach 65, put together a plan that shaves a few years off that number. It’s better to save as if you’re going to retire a few years sooner than desired because early retirement may come whether you want it to or not.
Another benefit of conservatively preparing for a premature exit is your employer may offer an early retirement package. You will be in a better position to accept an attractive offer. Also, early retirement packages can precede layoffs, so it’s nice to have options.
Prepare for the future
A good plan is most valuable when the world around you is falling apart. How did 2020 treat your plan?
If it’s important to you, plan for it. Put together a budget for expenses, review your insurance policies, make sure your beneficiaries are up to date, and your will remains true to your wishes. It’s too late to come up with a well-conceived plan when you’re in the middle of a crisis.
If you love to travel, now’s the time to plan your future adventures. Figure out where you want to go, what you want to do, and when you want to do it. Sure, you’ve always had the dream of an African safari sometime later in life, but now’s the time to put a date on it.
If you’re not doing it already, include travel in your retirement budget. Most people want to travel when they are done working, but most don’t budget for it. (Financial advisor hint: It can be expensive.)
Not to make this into a commercial, but now’s the time to put together a comprehensive financial plan. If you have the time, knowledge, and desire to do it yourself, I highly encourage you to go for it. If you need help, find a fee-only financial advisor who will help you with it.
The pandemic we are living through is miserable in so many ways. However, the worst thing to do is not learn from it. The last nine months have been a painful time for many, but the experience may ultimately help us all make better decisions and lead a more rewarding life.
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David Tuzzolino, CFA, CFP®, is the Founder and CEO of PathBridge Financial, a firm that specializes in providing comprehensive financial planning and investment management services for clients that are nearing retirement and love to travel.